As America gears up for the upcoming election, investors are closely watching the stock market, wondering which candidate—Donald Trump or Kamala Harris—might be better for their portfolios. Historically, the performance of the U.S. stock market has been influenced by the party in power, but which candidate could bring greater financial prosperity? The Motley Fool’s recent analysis dives into decades of data, comparing historical stock returns under Republican and Democratic administrations. With the S&P 500’s Shiller P/E ratio hitting record highs and economic uncertainties looming, understanding which candidate might yield better stock returns is more crucial than ever.
Economic Policies and Stock Market Implications: Trump vs. Harris
As the presidential election nears, investors are debating whether Donald Trump or Kamala Harris would be the better candidate for stocks. Given that economic policies directly affect the corporate landscape and stock market dynamics, it's essential to evaluate the impact each candidate might have based on historical and statistical data.
According to data analyzed by The Motley Fool, stock market returns vary significantly depending on which party holds the presidency. Historical figures reveal that the average compound annual growth rate (CAGR) for the S&P 500 under Republican presidents is 6.2%, while Democratic presidents have seen an average of 9.6%. This difference suggests that Wall Street generally fares better under Democratic administrations. But is history the best predictor of future returns, especially considering the economic challenges ahead?
High CAPE Ratios and Economic Uncertainty
America’s next president—whether it be Trump or Harris—will face a particularly tricky economic landscape. The current bull market, nearing its second anniversary, has inflated the S&P 500’s Shiller price-to-earnings (P/E) ratio to levels only seen a handful of times in the last 153 years. The Shiller P/E ratio, which accounts for average inflation-adjusted earnings over the previous 10 years, currently stands above 37, marking the third-highest reading since 1871.
Historically, when the S&P 500’s Shiller P/E ratio surpasses 30, it signals a potentially overvalued market. Out of the six previous instances where this has occurred, the market subsequently lost between 20% and 89% of its value. This alarming trend puts either candidate in a challenging position, as the risk of a market downturn could overshadow any immediate economic policies they implement.
Beyond the stock market’s inflated valuations, other economic warning signs persist. For instance, the longest yield-curve inversion in U.S. history suggests potential economic turbulence. Typically, long-term Treasury bonds offer higher yields than short-term bills. However, the inversion indicates that short-term bonds have higher yields than their long-term counterparts—an often-reliable precursor to economic recession.
The U.S. M2 money supply, a measure of money in circulation, also saw a notable decline in 2023, dropping for the first time since the Great Depression. Historically, similar contractions in the M2 supply have correlated with economic downturns, such as the depressions that followed each of the four prior instances of a 2% or greater year-over-year decline.
Historical Returns: The Party Effect on Stocks
So, who’s better for stocks, Donald Trump or Kamala Harris? Historical data suggests that Democratic presidents have delivered higher average annual stock returns compared to their Republican counterparts. From 1926 through 2023, Democratic presidents saw a more robust annual return of 14.78% on the S&P 500 compared to Republican presidents’ 9.32%.
The analysis further breaks down returns based on whether Congress was unified or divided during each presidency:
- Unified Republican: 14.52% average annual return over 13 years.
- Unified Democrat: 14.01% average annual return over 36 years.
- Divided with Republican President: 7.33% average annual return over 34 years.
- Divided with Democratic President: 16.63% average annual return over 15 years.
These figures indicate that while Republican presidents have achieved a respectable stock market performance, Democratic presidents, especially with a divided Congress, have historically overseen stronger stock growth.
Nevertheless, as The Motley Fool points out, past performance doesn’t guarantee future returns. Economic context, policy specifics, and external global factors play significant roles in determining market outcomes, and the upcoming election brings several uncertainties.
What Does the Future Hold for Investors?
Investors should understand that regardless of the election outcome, America’s next president will be taking the helm during an unprecedented time. With record-high valuations, an inverted yield curve, and historical money supply contractions, the economic backdrop isn’t ideal for immediate stock market growth.
However, patience is key. According to a study by Crestmont Research, analyzing rolling 20-year total returns of the S&P 500 from 1900 through 2023, every single 20-year period yielded positive returns. Even if markets encounter short-term volatility, long-term investors have historically prospered, regardless of the political party in power. This highlights the importance of a long-term investment perspective over trying to time the market based on political changes.
Despite the potential economic challenges, history shows that long-term investors often succeed regardless of the party in power. Whether Trump or Harris wins, understanding historical trends, staying patient, and adopting a long-term view remain crucial strategies for thriving in the stock market.
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